How to Allow Greece to Leave the Euro but Remain in the EU

After last Sunday’s Greek elections, Eurozone governments have begun to very quietly talk about Greece leaving the euro.

The Greeks are not particularly keen to do that.

But neither do they want to live for the next several years with an austerity program that is pushing hundreds of thousands of people into poverty.

With more debts falling due next month, Chancellor Angela Merkel said not another centime of the bailout package will be paid out unless Athens introduces the agreed savings and reforms.

But how realistic is that?

It is becoming clearer by the day that neither the center-right nor the left wing grlupings are able to put together a government. According to the Greek constitution, this means the country will have to hold another election next month.

Yet there is no reason to think that the Greeks will vote differently then. The EU and Eurozone governments realize this.

No wonder then that Eurozone countries are murmuring that Greece’s time is up. Officially, of course, they still insist that sticking to the austerity plan is the only way forward.

It is true that leaving the Euro carries enormous costs and risks. The outflow of capital already crippling this sickly economy, will accelerate to a flood. Greece’s stumbling banks may fail.

The state will almost certainly go bankrupt because it cannot possibly fully service its Euro-denominated debts with the European Central banks and governments anymore. Private creditors have already had to take a cut of up to 80 percent of the worth of their debt.

But there are advantages to returning to the Drachma, too.

Greece could then devalue its currency to regain economic competitivity. If it managed to continue the radical overhaul of the tax collection system and the public sector underway now, it could slowly put its fiscal policy back in order. Most importantly, Greeks would not be forced to lower wages and pensions quite so radically.

In legal terms, however, reintroducing a national currency is not easy. The Maastricht Treaty on Monetary Union never foresaw such an inglorious possibility.

The Lisbon Treaty of 2009 opens a way, but it is a radical one. According to article 50, a country can leave the EU and with it the common currency.

That is a terrible option for Greece, and for any other Eurozone member.

Greece would be deprived of billions and billions of Euros in EU financial assistance, including the structural and development funds which could help build up the Greek economy.

There would also be the immense loss of prestige -- not to speak of further capital outflows and loss of investor confidence.

Greek lawyers expert in EU legislation agree there is no easy way out, which is why Greece doggedly tries to retain the euro.

In the interests of protecting Greek democracy, keeping the country stable and giving its citizens a perspective, it is time for the EU to come up with Plan B.

It could go like this.

If we assume that Greece will have to hold new elections, there is little point in presenting voters with the same party programs as before. The outcome will be the same.

In that case, the EU should offer Greek voters a real alternative: leave the Eurozone, and we will find a way to allow you to remain in the EU.

Devalue the currency, ease a bit on the cuts in social expenditure, but continue to make your economy competitive. Then, we will help you.

Were that to happen, it would mean Greece would have the same status as other non-Eurozone countries, such as Sweden, the UK and Poland.

It would mean too that Greece would continue to have access to funds, to the internal market, to the free flow of labor, capital and goods. Above all, it would remain anchored to the EU institutions which are crucial for Greece’s stability and democracy.

Of course, leaving the euro would be a costly affair.

But the growing consensus is that because Greece is so uncompetitive and will not make the turnaround for many years, it is preferable to stop pouring bailout billions into a bottomless pit. Better to cut one’s losses now.

A well thought-out exit scenario for Greece might even calm market apprehensions that Spain, Italy or Portugal might go the same way.

Of course, opponents of such a plan would inevitably argue that because a precedent has been established, other countries that refuse to adhere to the strict rules of the euro club could simply walk away.

I am not so sure. The price of leaving the Euro is still very steep. Also, every EU government has now seen that those economies that have undergone painful reforms are more competitive in the long run. They set a good example.

Moreover, being in the Eurozone means being part of the inner core of what is clearly a two-speed Europe. But then, Europe already consists of opt-outs: defense and Schengen for example.

So if a way can be found for Greece to leave the Euro but remain inside the EU, it should be taken. Politically and economically, it just might allow the EU break the vicious circle of this euro crisis.

Heads of state and government have already agreed to meet for an extra EU summit on May 23. That would be a good time to discuss such a solution and even think strategically.

Judy overlooks one crucial point. Greece will have to respect the 3 percent deficit ceiling like any EU member state. And it will have to reduce its public debt to 60 percent of GDP one day, even it is only in 2025!
The devaluation that goes along with the re-introduction of the drachme will, of course, worsen the poverty as much as direct wage cuts. So, I would rather stick to euro-zone membership and give them a few years more to breathe.

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